How strong is treasury buying-power when it comes to negotiating with banks? What influence do treasurers have over the cost of their banking? A new report aims to reveal just that.
When it comes to buying bank services, corporate treasurers have seen their negotiating power increase over the past three years – and this is a trend that is expected to continue until at least 2016. But many factors are at work when it comes to assessing treasury buyer power.
According to the recent IBISWorld Procurement Report on Corporate Treasury Services in the US, analyst Kevin Culbert says many banks have limited their price growth and used discounts to take advantage of a low-price/high-volume transaction strategy. IBISWorld a Los Angeles-based international publisher specialising in procurement research, reports that annualised growth rates for bank costs were 1.8% between 2010 and 2013 and are forecast to be 1.7% between now and 2016. This will give an average cost rise across the period from $280 to $299. “This rate is slower than historical norms,” notes Culbert. “On the flip side, service discounts provided by banks are at historic highs.” With price volatility fairly limited he suggests that it should not be factored into buying decisions.
The average price for account maintenance in 2013 was about $32 per month per account. This only includes the fixed price banks charge to cover their overheads on a corporate transactional account. “The broad array of services offered under corporate treasury services, coupled with extensive service specialisation, ensures a wide price range,” notes Culbert. He estimates that the price of corporate treasury services used ranges from $8 to about $5,000 per month per account. “We strive to provide an accurate average of the prices that are paid by clients in the domestic US market. Having said that, large companies can have an outsized effect on averages. As such, our benchmark price will pale in comparison to the prices paid by large international companies but may appear large to small companies.”
The data and research compiled for the report – which includes information from US-based treasury research firm, Phoenix-Hecht – gives an overall corporate treasury banking services buyer-power score of 3.1 out of 5.0. The higher the score, the more negotiating power buyers have at the bargaining table. “In general, corporate treasury services have a lower buyer-power than other professional services,” comments Culbert. Although these results concern US corporate treasury banking services only, the global banking system is increasingly intertwined, and as such, Culbert believes that it is likely the results can be translated to a certain extent to other regions, certainly better than they could in decades past.
Although some trends have increased buyer power over the past three years, several factors have limited buyer negotiating power. First, says Culbert, there are relatively few substitutes available to buyers, which more or less locks buyers into purchasing the services when needed. “Similarly, corporate treasury services have a high degree of product specialisation; most vendors tailor contracts specifically around an individual client’s needs and specialisation always increases costs to the vendor, which raises prices for buyers.”
Culbert also cites the highly concentrated nature of the corporate treasury services market as a constraint on buyer power. “Although more regional banks have started offering corporate treasury services, the top five US banks still dominate the market, accounting for more than 60% of available market share,” he reports. The large banks have dominated the market due to the significant capital investments required to develop the necessary infrastructure and back-office systems to operate in this space. This factor, he believes, is expected to diminish over the coming years as the technology becomes more ubiquitous, causing more demand to move beyond tier-one banks.
The effect of regulatory pressure on banking costs may diminish this effect to an extent. “In general, an increase in regulation requires an increase in the amount of resources devoted to oversight and any required restructuring,” Culbert explains. In turn, portions of these costs are likely to be passed on to clients. However, some will likely be absorbed by banks themselves. A bank may choose to absorb a portion of the extra cost because growth in the number of operators that provide a service – whether it is corporate treasury services or otherwise – increases competitiveness, driving down prices. “By keeping prices low or absorbing an increase in costs, banks would be hoping to keep clients on-board for related services that generate additional or higher returns.”
IBISWorld Procurement Report buyer-power scores are specific to the market, not an individual operator within the market. The factors that impact the score – recent price trends, availability of substitutes or price volatility, for example – impact the market as a whole. “In order to gain leverage, corporate treasurers are going to have to look at factors that they can play with, such as transaction volume and the size of the services provider,” says Culbert. “Other factors such as increasing the number of services used by the bank will also increase leverage at the bargaining table.”